Is the economy out of rock bottom?

As Turkey’s economy managers extend the duration for incentive packages introduced earlier in the past two quarters to boost the economy an attempt revitalize the economy, which has entered a “technical recession”, the never-ending love domestic residents have for the dollar seems to be creating an obstacleAlthough the soaring interest rates spurred by the shock caused by the rising exchange rates in August 2018 have fallen to lower levels after hitting peak in September and October, those who worry that a new currency shock might occur due to higher political tension over the upcoming 3 March local elections have been literally stocking up on dollars for a while. This trend is already evident in statistical data of the Central Bank. In the week ending March 15, the increase in the amount of foreign currency deposits of regular banks and participation banks had reached 4 billion dollars. Domestic residents’ total foreign currency deposits has risen to USD 175.8 billion. As such, the rise in the amount held in foreign currency deposits that began on September 7 in 2018 reached $ 25 billion over six months. A significant part of the increase does not come from actions of companies or financial institutions but from actions of real people. This comes at a time where domestic residents don’t have any foreign currency debt. According to experts, this trend owes to the shock caused by sharp spikes in the rate of the dollar and euro against the lira in August 2018, which was part of a trend of a slide in the lira which had started ahead of the previous year’s general election. Experts note that as Turkey faces a local election, there is political ambiguity and the main fear and anticipation on the part of individuals is that the exchange rate may soar again after the elections.

Capital costs of banks
falling
However, economists expect that this fear will be alleviated after the local elections. The reason behind this expectation is that there has been a significant decrease in the interest rates since they reached peak in September and October and that the loans market is getting out of rock bottom in comparison with the base levels in February. At the same time, the US Federal Reserve leaving the interest rate ountouched in its meeting on March 20 and announcing that it will likely not increase the rate in 2019 is expected to reflect positively on countries like Turkey. Another factor that has caused the markets to relax is the fact that the Fed has announced plans to end balance sheet runoff in September. These statements have already had a relaxing effect on US and global interest rates. The US 10-year bond yields fell to 2.49 from 2.62 and then fluctuated near the 2.50 level. After the Fed announced that it would leave key lending rates untouched, the London interbank offered rate (LIBOR) to borrow dollars for one-year fell to 2,85 from 2,81. The LIBOR rate had risen to as high as 3.15 percent in the start of the year. The concrete benefit by the Fed’s decision to leave lending rates unchanged actually comes from its contribution to the actual Libor rate. In other words, the capital costs of Turkish banks are falling.

Will loan activity be suf
ficient?
On the credit side, loans issued by Turkish banks which decreased after August have started to increase again after hitting the lowest level in early February. As such, over the last 1.5 months, the total amount of loans has increased by 77 billion lira.
Experts note that special loan packages offered primarily by public banks to revive the economy have contributed to the rise in the overall amount of loans and in the fall of interest rates. A quick look at the data reveals that on Feb 1, the amount of loans issued to domestic borrowers which stood at 2 trillion 248 billion liras on Feb 1 increased 2 trillion 326 billion as of Feb 15 by 77 billion lira (a 3.4 percent increase). According to senior banking executives, this increase in loans will continue on through March and April. So, are these levels of credit growth, which is vital to the economy, sufficient or will they last?
According to experts, looking at the current picture, it is possible to say that the economy is now going back up after hitting the bottom. At the same time, budget and workforce data indicate that the recovery will be more challenging than expected. In other words, the macro leap in the second half of the year will be weak and will not be felt strongly. Analysts say, therefore, the exchange rate remaining stable and the disinflationary trend this will bring about are of vital importance.